Investment: Poor old Bill Gates just can't stop getting richer
Wednesday 10 March 1999
We are talking big numbers here. Even though Bill Gates keeps selling stock in Microsoft, he cannot do it quickly enough to keep up with the explosive growth of the value of his remaining shareholding. His holding in Microsoft is down from 44 per cent to 18.5 per cent, but the incredible 59 per cent compound annual rate at which the shares have grown since the firm went public 13 years ago means that his holding is now worth more than $75 billion, and still rising.
Microsoft shares are up 50 per cent since the Justice Department started its antitrust case against the firm last year. Nothing, it seems, can stop the Microsoft juggernaut. Warren Buffett called the shares "the best performing endowment fund in the world".
Sensible fellow that he is, Gates is unloading his shares and giving them to charity. According to Fortune, he sells an average of 80,000 shares in Microsoft every day. He has set up two charitable foundations to dispense help to philanthropic causes: their assets amount to $6.5bn. They have given away $350m, more than most Fortune 500 companies earn in a year. And Gates has his personal investment portfolio worth $5bn - small beer compared with his Microsoft stock, but the kind of sum that still demands a modicum of attention.
So how does Michael Larson, the investment manager looking after the Gates billions, deal with all that money?
His strategy is fundamentally simple. Gates, having made his fortune, is no hurry to lose it. His foundations, with their constant need for cash, are more interested in securing their capital and a decent income than they are in creating huge capital gains. The watchwords here are risk minimisation, not maximising returns.
The biggest problem Gates has as an investor is to reduce the heavy concentration of his wealth in one single stock. In his words: "The money I have outside Microsoft is less than 10 per cent of the total. So we will sell stock periodically to get more diversity. It is the same strategy that most individual investors engage in." (Don't laugh: remember this is the United States, where wealth accumulation is not questioned as a desirable norm).
Mr Larson has steered most of the Gates fortune into defensive investments. About 70 per cent of the Microsoft founder's personal investment portfolio is in government bonds, and short-dated ones at that. He also has some emerging market debt and some high yield bonds. The balance of the fund is split between private equity (50 per cent), property and oil (25 per cent) and a few shares Mr Larson expects to do well when and if Wall Street's love affair with technology stocks finally comes to an end (as it surely must). There are wider lessons. One is that asset allocation - how much of your money you put into each type of asset - is where the real value in investment management is added. It is not (as most punters still think) in picking individual stocks.
Mr Larson's comments on the markets also make a lot of sense. His deadpan comment on Wall Street is that "the market is high right now and there is an awful lot of excitement about tech stocks". His bias towards short- term bonds is partly a reflection of his view that interest rates are trending higher - he expects another 1 per cent on long-term interest rates - and partly about as clear a statement a fund manager can make that he thinks the markets are overvalued.
Larson reckons the cycle in the market will turn soon. A trigger point will change the emphasis from technology and today's other fashionable sectors. Agriculture he expects back, and the bombed-out oil sector looks interesting too. In my book, investors with even a modicum of appetite for risk should be positioning for a comeback in the oil sector this year.
But the central paradox remains. Bill Gates has the Midas touch. He just can't stop getting richer. For someone who says he will give away all his wealth by the time he dies, the hi-tech boom is a major obstacle that even all the efforts of one of the best fund managers in America cannot surmount.
Perhaps poor old Bill may actually have to turn to an independent financial adviser and start paying commission on a lot of expensive UK investment funds that don't really earn their corn. That should do the trick, if all else fails.
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